J . Secretary - SEC.gov€¦ · Page 2of17 . December 30, 2016 . BrentJ. Fields, Esq. SEC File Nos....

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HarveyKaloramaPartnerscom

LEGAL SERVICES

Harvey L Pitt ChiefExecutive Officerand Managing Director

December 30 2016

By Hand and by Email

Brent J Fields Esq Secretary Securities and Exchange Commission 100 F St NE Washington DC 20549

Re Request for a Hearing on Hartford Life Ins Co Substitution Applications SEC File Nos 812-14446 amp 812-14447

Dear Mr Fields

Kalorama Legal Services PLLC is counsel to Capital Research and Management Co (CRMC) a registered investment adviser managing the American Funds Insurance Series (AFIS) mutual funds CRMC opposes the above-captioned applications (Applications) filed by Hartford Life Ins Co (Hartford Life) and others (collectively Applicants ) initially on April 21 2015 but amended twice thereafter on May 25th and August 31 st 2016 and respectfully requests that a hearing be held on the Applications before any decision by the Commission (or its Staff acting pursuant to delegated authority) is rendered

The Applications seek formal Commission approval for an unprecedented substitution proposal-unilaterally overriding individual investment decisions regarding investors choices of assets underlying several hundred thousand variable annuity contracts purchased from Hartford Life and substituting Applicants conflicted investment choices Applicants propose that their unprecedented objective be achieved through express Commission authorization for the Applicants to bypass the purchasers of these contracts denying those purchasers their inherent-and contractual-right to exercise their own investment judgment Commission approval would also authorize the Applicants precipitous and unilateral termination of existing contractual relationships between the variable annuity contract holders and investment providers such as AFIS as well as investment managers of those funds like CRMC

Page 2of17 December 30 2016 BrentJ Fields Esq SEC File Nos 812-14446 amp 812-14447

without any consideration of the rights of these contractholders The Commission should not lend its imprimatur to such an unprecedented substitution

We urge that the Commission decline to issue the requested orders instead directing Applicants to follow the customary and less convoluted method by which new insurance dedicated funds are developed and marketed to variable annuity contractholders-that is by establishing and marketing new funds as additional investment choices for contractholders This well established method requires no government intrusion or action and is wholly lacking in the controversy surrounding the instant Applications This approach would also afford contractholders the freedom to which they are contractually entitled-to determine for themselves the value for and the personal aptness of the Applicants proposed new funds in light of each contractholders individual circumstances

On behalf of CRMC we hereby request a hearing on the Applications1

I Reasons for Granting the Requested Hearing

The Applicants seek a Commission Order authorizing them to substitute certain securities underlying the variable annuity contracts sold by Hartford Life pursuant to Investment Company Act of 1940 (1940 Act) sect26(c)2 as well as an Order pursuant to 1940 Act sect17(b)3 exempting the proposed substitution transactions from 1940 Act sect17(a)4 In

The Applications would if approved without a hearing by the Commission (or if approved by its Staff pursuant to delegated authority) abrogate existing and valuable arms-length contracts without affording CRMC AFIS or AFIS funds investors (adversely affected contractholders) that affirmatively chose to invest in AFIS Funds due process of law Hartford Life contract holders own approximately $73 billion in the AFIS Funds and the Applications would affect 5-14 of each affected Funds assets as of November 30 2016 Under the Fifth Amendment to the US Constitution the Administrative Procedure Act and the 1940 Act CRMC as the manager of the AFIS Funds would suffer demonstrable and material harm by the grant of the government action sought in the Applications and therefore has standing to contest these Applications and to request a hearing on them See discussion at p 15 infra

2 15 USC sect80a-26(c)

3 15 USC sect80a-17(b)

4 15 USC sect80a-17(a)

Page 3of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp812-14447

straightforward terms the Applicants seek to replace actively-managed third party funds selected by variable annuity contractholders themselves in the exercise of their individual investment judgments with quantitative index-type funds selected by the Applicants and created as well as managed by Hartford Investment Management Company (HIMCO) an affiliate of Hartford Life from which HIMCO will earn advisory fees5 Based on public filings hundreds of thousands of variable annuity contracts will be affected by the proposed substitutions amounting to about $161 billion in fund shares 6 If the Applications are granted contractholders will suffer real and immediate harm including higher fees due to the loss of advantageous advisory fee breakpoints

The Applicants substitution request is

bull Neither necessary nor appropriate

bull Not in the public interest

bull Inconsistent with the protection of investors and

bull Inconsistent with the purposes fairly intended by the policy and provisions of the 1940 Act

the standards under the 1940 Act that the Applications must satisfy

The proposed involuntary substitutions would materially decrease the value of the contracts investors originally purchased Not only would contractholders be deprived of the investments they originally chose but many contractholders also purchased investment guarantees based on the performance of these actively-managed funds The proposed replacement funds would provide contractholders with markedly lower upside thereby devaluing the guarantees these investors purchased and depriving contractholders of the potential upside they actively sought and for which they paid

The driving force for these fund substitutions is not the protection of middot contractholders-the only legitimate basis for substitution applications

5 Both HIMCO and Hartford Life are subsidiaries of Hartford Financial Services Group Inc

6 Seen 1 supra

Page 4 of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp812-14447

under the 1940 Act-but rather is Hartford Lifes desire to sell its variable annuity business which is in runoff (that is no additional contracts are being sold or issued and Hartford Life is actively seeking to eliminate the existing contracts from its books) 7 Although Hartford Life has amended the Applications several times it has not adequately addressed the issues raised here nor has it provided a sufficient record on which the Commission could predicate approval of the Applications and therefore a hearing is necessary to determine whether the substitutions are entirely consistent with the protection of investors8 Hartford Lifes desire to runshyoff andor sell its variable contract business is not speculation but fact 9

The proposed substitution is calculated to facilitate this effort by making

7 See Hartford Fin Servs Grp The Hartford to Focus on Property and Casualty Group Benefits and Mutual Funds Businesses The Hartford Newsroom (Mar 21 2012) available at httpsnewsroomthehartfordcomreleasesthe-hartford-to-focus-onshyproperty-and-casualty-group-benefits-and-mutual-funds-businesses (noting that the company is placing its individual Annuity business into runoff and is pursuing sales or other strategic alternatives for Individual Life Woodbury Financial Services and Retirement Plans

8 AFIS counsel attempted to obtain insight into the Staffs support for the Applications by making a Freedom of Information Act (FOIA request for documents relating to discussions between the Staff and Hartford Life the existence of which was disclosed when the Applications were first filed on April 21 2015 The original FOIA request made on September 9 2015 was apparently lost On February 17 2016 the FOIA Office acknowledged receiving the second iteration of this request Since then the FOIA Office has sent emails on July 15th August 4th August 30th September 23bulld November 1bullt and December 21 bullt 2016 stating the FOIA Office is still waiting for feedback from the SEC program office and projecting various response dates To date no documents have been produced

We join AFIS counsels request that these communications be produced-and made part of the record-as soon as possible since they are likely directly relevant to issues that should be considered in a hearing CRMC cannot fairly address these issues without access to all materials reflecting Commission or Staff considerations relevant to these discussions The FOIA Offices months of inaction on the pending FOIA request violates the FOIA and Commission procedures as well as a denial of due process

9 See K Chiglinsky amp M Monks Hartford Said to Enlist JPMorgan to Sell Annuity Runoff Business BLOOMBERG (Sept 21 2016) available at httpswwwbloomberg comn ewsarticles2016-09-21 hartford-said-to-enlist-jpmorganshyto-sell-ann u ity-runoff-business 0 Bull amp A McNestrie The Hartford Explores Sale of $4 7bn VA Unit THE INSURANCE INSIDER (Sept 21 2016) available at httpwwwinsuranceinsidercomthe-hartford-explores-sale-of-4 7bn-va-unit The Hartford Press Release The Hartford Announces Expanded Hedging Program that Effectively Eliminates Currency and Equity Market Risks on Japan Variable Annuity Blocllt (Apr 11 2013) available at httpsnewsroomthehartfordcomreleasestheshyhartford-announces-expanded-hedging-program-that-effectively-eliminates-currencyshyand-equity-market-risks-on-japan-variable-annuity-block See also The Hartford

Page 5 of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp 812-14447

(i) Existing variable contracts less attractive to contractholders reflecting Hartford Life s hope for a more accelerated rate of contract surrenders and

(ii) This line of business more hedgeable and therefore more attractive to a potential buyer

Hartford Life sold investment guarantees that were advantageous to the contractholders purchasing them but now Hartford Life wants to renege on the deals it struck with investors and extricate itself from its obligation to live up to its original guarantees Standing behind bargains voluntarily made is a core obligation inherent in investment agreements like these variable contracts And even were that not true attempting to invoke government action to abrogate valid current contracts is not a result to which Hartford Life is entitled Hartford Life is conflicted with respect to the Applications because it would increase its fee revenues if it succeeds in obtaining Commission approval to employ HIMCO to act as the investment adviser to the proposed replacement funds

CRMC acknowledges that-in addition to its primary concern for the interests of contractholders and especially those who chose AFIS Funds as their underlying investments-it also would be deprived of the fees to which it is contractually entitled from its management of the AFIS Funds since those fees would effectively be confiscated by Hartford Life if the Commission granted the Applications The fact that Commission action sought in the Applications would inflict harm on both contractholders and on the investment manager of certain underlying investments however serves to underscore-not diminish-the necessity for a Commission hearing before such a forced governmental abrogation of CRMCs existing contractual rights occurs10

Financial Services Group Inc INVESTOR PRESENTATION (Nov 2016) at pp 5 21 available at https fir thehartfordcoml-mediaFilesT Th eha rtford-1 Rreports-andshypresentationshig-101-november-2016pdf

1deg CRMCs revenues are of course always subject to the exercise of contractholders ability to move thei r underlying investments to other investments in the ordinary course of business here however the Applicants proposed substitutions are designed to benefit Hartford Life and would disadvantage its contractholders by changing the character of contractholders investment decisions without their consent informed or otherwise

Page 6of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp 812-14447

David Grim Director of the Commissions Division of Investment Management recently called attention on multiple occasions to variable insurance contract buyout offers which present similar issues to those inherent in the proposed investment substitution Hartford Life seeks here In 2015 and 2016 speeches Mr Grim alerted the industry to the Staff s belief that these offers continue to warrant careful scrutiny given the appropriate concern that these offers may not be beneficial for all or even most contractholders11 Mr Grim also noted how difficult it is to quantify the value of a living benefit and thus the inherent difficulty in comparing contracts in exchange offers or in assessing any such buyout offers

In his most recent remarks Mr Grim drew attention to the recent SEC INVESTOR BULLETIN Variable Annuities-Shqud You Accept a Buyout Offer12 discussing the advantages and disadvantages associated with insurance company buyouts of variable insurance contracts The INVESTOR BULLETIN properly warns investors that insurance companies make buyout offers to further their own best interests not solely because such buyout offers are believed to be in contractholders best interests The BULLETIN also reminds investors that these buyout offers are optional and contractholders are not obligated to accept them

Mr Grims speeches and the recent INVESTOR BULLETIN reflect a higher level of Staff scrutiny for buyout offers of variable insurance contracts with guaranteed benefits by insurance company issuers The Applications proposed fund substitutions are analogous to these buyout offers albeit more detrimental to contractholders

First they are mandatory-contractholders have no choice as they do in a buyout offer and therefore the proposed substitutions are coercive and

11 D Grim Remarks to the ALI CLE 2016 Conference on Life Insurance Products Washington DC (Nov 4 2016) available at httpswwwsecgovnewsspeechqrimshyremarks-ali-cle-2016-conference-life-insurance-productshtml and D Grim Remarks to the ALI CLE 2015 Conference on Life Insurance Company Products Washington DC (Nov 2 2015) available at httpswwwsecgovnewsspeechremarks-ali-cle-2015-confshyI ife-insu rance-company-products-qrimhtmI

12 SEC Office of Investor Education and Advocacy Investor Bulletin Variable Annuities- Should You Accept a Buyout Offer (July 14 2016) available at httpswwwsecgovoieainvestor-alerts-bulletinsib buyvarannuitieshtml

Page 7 of17 December 30 2016 BrentJ Fields Esq SEC File Nos 812-14446 amp812-14447

Second unlike buyout offers Hartford Life is not offering any consideration or premium to account value in exchange for contractholders agreement to relinquish funds they chose

For these reasons the proposed substitutions should be subject to an even higher level of scrutiny than that accorded buyout offers Much like buyout offers Hartford Life seeks to utilize the proposed substitutions to limit its exposure under the existing guaranteed benefits to which it freely committed and on the basis of which it was able to sell hundreds of thousand of contracts Given the Staffs concerns noted above it is not readily apparent how granting the Applications would further the public interest concomitantly calling into question how these proposed substitutions could satisfy the 1940 Acts rigorous standards for granting this type of exemptive relief

As Mr Grim noted it is difficult to quantify the value of a living benefit and thus it is difficult to assess any offer for a buyout of ones contract It is follows a fortiori that contractholders would have similar or greater difficulties assessing the impact of the proposed substitution of their contract benefits Hartford Life seeks Commission approval of the Applications to endorse Hartford Life s effort to impose its own investment judgment in place of the investment decisions made (and continuing to be made) by its contractholders Hartford Life s sole purpose in proposing these substitutions is not to benefit its contractholders but to facilitate the implementation of its own strategic business plan

The Applications-especially in the absence of a hearing-do not permit the Commission on the current state of the record to make a determination that these proposed substitutions are suitable for much less in the best interests of all Hartford Lifes contractholders

II Factual Issues

CRMC requests a hearing on these Applications to determine a number of issues including the following

A Providing an Adequate Basis for the Commission and Interested Parties to Assess the Effect of the Proposed Substitutions on Contractholders Guarantees

As noted above many Hartford contractholders purchased their variable annuity contracts with valuable investment guarantees in the form of living income guarantees and death benefits These guarantees


were priced based on the selection of actively managed mutual funds available to contractholders at the time of purchase Contractholders guarantees are considerably more valuable to them (and conversely more expensive for the insurer) when contractholders have access to actively-managed funds and possess the freedom to seek multiple investment managers with different investment styles This is so because actively-managed funds offer greater potential upside than quantitative index-type funds-actively-managed funds seek to outperform the market not simply match it and they pay guaranteed returns in excess of the highest value of the underlying funds Contractholders paid a premium to purchase and maintain these guarantees above and beyond what they paid for their contracts

The proposed substitutions essentially rewrite each of these contractual guarantees giving contractholders far less valuable and inexpensive guarantees covering primarily passively-managed proprietary funds without compensation reflecting the less valuable guarantee Contractholders will thus be deprived of the full benefit of the bargain they entered into with Hartford Life when their contractual guarantees were originally purchased Further given the value of the guarantee to the contractholders it is highly unlikely that contractholders would be able to opt in favor of purchasing similar guarantees from other insurers-either at a similar price or at all

The Applicants have not provided the Commission and its Staff with sufficient information to enable an adequate assessment of the effect of the proposed substitution on the investment performance guarantees contractholders purchased At a hearing we anticipate presenting expert testimony about the financial harm contractholders would suffer if the relief requested were granted harm that is inconsistent with the Commissions mandate to protect investors While CRMC did not issue these guarantees its concern is for the AFIS shareholders who purchased a package consisting of a variable annuity contract and mutual fund shares-including AFIS Fund shares-and the welfare of these contractholders are CRMCs primary concern

One need not look beyond the actual iterations of the Applications for confirmation that the proposed substitutions are likely to have a negative impact on guarantees purchased by contractholders The initial Applications contained a condition routinely found in other substitution applications-that

The [proposed] Substitution will not adversely affect any riders under the Contracts

Pa ge 9of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp812-14447

Presumably however Hartford Life realized that it could not satisfy this condition and the Applicants revised the condition in the first amended and restated Applications abandoning the initially proposed assurances that contractholders existing guarantees would not be altered As revised this initial condition was weakened to provide

The Substitution will not result in the loss of any Contract guarantees because to the extent that an Existing Portfolio is a permissible investment option under a rider its corresponding Replacement Portfolio is a permissible investment option under the rider

In the second iteration of the amended and restated Applications the Applicants simply removed the entire condition The evolution of the treatment of this condition and its significance to contractholders are not self-evident and would be required to be developed at a hearing 13

B Provide a Basis for the Commission and Interested Parties Adequately to Assess the Impact the Proposed Substitutions would have on Various Contractholders Existing Guarantees

The Applications state that for each substitution of a current fund between 56 and 67 different variable annuity contracts will be affected each having thousands of investors Because the numerous contracts listed in the Applications have materially different guarantees before the Commission could approve individual substitutions it must assess the differing degrees of impact on each type of guarantee to enable it to make a finding whether the proposed substitutions are consistent with the protection of investors as contemplated and required by 1940 Act sect26(c) The current state of the record makes it highly unlikely that the Staff has been able to perform this rigorous analysis and given the conclusory statements in the Applications neither have we

Instead the Applicants apparently intend for all to rely solely on their assertions But the 1940 Acts standards make it impossible for the Commission to approve the proposed substitution-even were the Commission otherwise disposed to grant the Applications-without a

An important benefit provided by a hearing would be to enable the Staff the Commissioners contractholders and all other interested part ies to question the Applicants about the meaning (and evolution) of the language contained in the proposals

13

0of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp812-14447

careful and complete examination of the underlying predicates for the Applicants assertions Moreover given that these are individual and group deferred annuity contracts the consequences of the proposed substitutions for the retirement plans of thousands of contractholders must also be examined Unfortunately the Staff and the Commission-not to mention adversely affected investors and interested parties-are prevented from performing this review in the absence of any factual analysis in the Applications

C Provide a Sufficient Basis for Determining if the Proposed Replacement Funds Are Materially Similar to the Current Funds

Many of the proposed replacement funds are quantitative indexshytype funds some of which have not yet begun operation In contrast CRMC actively manages AFIS Funds that have a long track record of consistently superior performance Hartford Life asserts it is acting in contractholders best interests by forcing upon them a conversion of their freely-chosen funds with brand new unproven funds that will generate substantial fees for HIMCO Concurrent with its effort to sell its variable annuity business Hartford Life seeks the Commissions permission to increase Hartford lifes business revenues (investment advisory fees) and decrease its costs (guarantees) but without any concomitant benefit for investors

Many of the proposed replacement funds have objectives and strategies markedly dissimilar from the funds the Applicants propose to replace A hearing is required to enable adversely affected investors and interested parties to assist the Commission in considering and understanding Hartford Lifes proposal to replace three markedly distinct AFIS Funds with a single Hartford-advised fund The three AFIS Funds Hartford Life proposes to replace each have different investment objectives strategies and portfolio securities It is not possibleshycertainly not on the current state of the record-to conclude these existing funds possess substantially similar objectives strategies and securities all of which would be satisfied by a single Hartford-advised fund

Hartford lifes proposed replacement funds have been registered over a year but still have not attracted their first investment dollars including seed money from Hartford Life and therefore lack any investment operations Given this lack of any track record Hartford Life in many instances compares the investment results of the AFIS Funds to a composite This is an inappropriate and inapt comparison and denies


investors information they are obligated to receive to make educated and informed investment decisions

Moreover many of the composites utilized consist of only a few accounts with very small balances or contain non-fund accounts all of which makes comparisons to the composites inapt Only two of the composites presented as comparisons to AFIS Funds have assets in excess of $1 billion Some of the accounts in the composites are not subject to the diversification requirements tax restrictions and investment limitations imposed by the 1940 Act or Subchapter M of the Internal Revenue Code14 Consequently it is incumbent upon the Commission-were it inclined to approve the Applications-to determine whether and to what extent the claimed performance of the composite would have been less favorable had its component accounts been registered investment companies

The comparisons supplied by Hartford Life-without any effort to test their basis and examine underlying assumptions-are currently insufficient to permit either the Commission or its Staff to find that the proposed replacement funds are similar to the current funds

The Applications proposed change in investment strategy-from mature high-performing funds to newly-formed funds and from active to passive management-and the significant differences in the objectives and strategies of each of the funds amount to material changes in investment strategy for the AFIS Fund shareholders Hartford Life is asking the Commission to permit Hartford Life to replace AFIS investors chosen investments with completely different investments essentially substituting the Applicants judgment for those made by the investors Granting such relief would be inconsistent with the purposes fairly intended by the policy and provisions of the 1940 Act Moreover if the Commission were to grant Hartford Life s request especially without a hearing the Commission would effectively be facilitating-and putting its imprimatur on-this apparent breach by Hartford Life of its fiduciary obligations to its own contractholders

Ill Legal Issues

A The Grant of the Proposed Applications Would Constitute an Unprecedented and Inappropriate Application of 1940 Act sect26(c)

26 USC sectsect851-855 14


Over a number of years insurance companies have obtained Commission exemptive relief for fund substitutions But here granting the Applications would provide Hartford Life with different and more favorable treatment from that previously accorded prior applicants-and in the absence of any evidentiary record providing a legally sufficient basis for doing so

For example earlier this year the Staff pursuant to delegated authority permitted Principal Life Insurance Co to effect a fund substitution15 The Principal order contains two conditions specifically designed to protect contractholders that these Applications do not contain

bull First Principal represented that the proposed substitutions would have no adverse impact on existing guarantees and

bull Second it represented that for three years from the substitution date neither it nor its affiliates would receive any direct or indirect benefits as a result of the substitution of the replacement funds

The first condition is found in the vast majority of the orders upon which the Applications rely as precedent and the second condition also appears in a significant number of the orders cited by Hartford Life as precedents At a minimum a hearing would enable the Staff Commissioners contractholders and interested parties to explore the absence of these two conditions in the Applications the reasons for those omissions and whether (as well as to what extent) the absence of those conditions adversely affects the interests of investors

Contractholders who selected the AFIS Funds and purchased a guarantee would be harmed if their funds were replaced because the guarantees they purchased long ago would be rendered less valuable concomitantly meaning that they would have overpaid for those guarantees As earlier noted Hartford will receive advisory fees from the replacement funds The two conditions normally included in applications

15 See 1940 Act Rel Nos 32030 (Mar 17 2016) (notice) available at httpswwwsecgovArchivesedgardata812797999999999716020755filename1 pdf and 32067 (Apr 8 2016) (order) available at httpswwwsecgovrulesic2016icshy32067pdf


of this nature but absent here would prevent contractholders from being harmed and would ameliorate Hartfords conflict of interest We do not know the reasons (if any) that Hartford Life believed it was appropriate to omit these key conditions from its Applications but we assume that Hartford Life could not make these representations (as is usually the case with applications of this nature) if it were required to do so The omission of these two conditions is unambiguously inconsistent with the standard that must be met by applications of this nature-the protection of investors Because the Staffs delegated authority to issue notices on exemptive applications does notextend to matters that

[P]resent significant issues that have not been previously settled by the Commission or raise questions of fact or policy indicating that the public interest or the interest of investors warrants that the Commission consider the matter

the issuance of a notice without these two conditions that typically accompany such substitution applications clearly raises issues not previously settled by the Commission16

B Whether the Proposed Substitutions Are Consistent with the Policies Underlying the Provisions of the 1940 Act

In addition to the foregoing concerns the Applications present no basis upon which the Commission could predicate a finding that the proposed substitutions are consistent with the policies underlying the 1940 Act outlined in sect1 (b)17 That section states in relevant part that

The national public interest and the interests of investors are adversely affected-

(2) When investment companies are organized operated and managed in the interests of directors officers investment advisers depositors or other affiliated persons thereof rather than in the interest of all classes of such companies security holders or

(6) When investment companies are reorganized become inactive or change the character of their business or when

16 See17 CFR sect 20030-5(a)(1) (2016)

17 15 USC sectsect80a-1(b)(2) and (6)


the control or management thereof is transferred without the consent of their security holders

The proposed substitutions are designed to benefit Hartford in its planned exit from the variable annuity business to the disadvantage of contractholders and change the character of contractholders investments without their consent in clear violation of the policies reflected in 1940 Act sect1(b)

It is significant in this context that initially substitutions were permitted merely upon notice to contractholders Given the adverse impact on investors in 1966 the SEC recommended that Congress among other things amend Investment Company Act sect26 to give shareholders a voice in fund substitutions

Accordingly the Commission recommends that section 26 be amended to require that proposed substitutions may not occur without Commission approval Not only would there be Commission scrutiny but interested shareholders would also have an opportunity to state their views about the proposed substitution Before issuing an order approving the substitution the Commission would be required to find that the substitution is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act10

The 1940 Act was subsequently amended in 1970 to add this provision affording both shareholders and interested parties an opportunity to challenge substitution applications through the hearing process The proposed substitutions are precisely the sort of action for which a hearing would be appropriate given the significant factual and policy issues that have not been developed or addressed in the Applications

C The Benefits of Actively-Managed Funds and Guarantees Dwarf the Modest Cost Savings Hartford Life Suggests

Historically a large part of the Staffs review of fund substitution applications has focused on determining whether contractholders would

See SEC PUBLIC POLICY IMPLICATIONS OF INVESTMENT COMPANY GROWTH HRRep No 237 891

h Cong 2d Sess (1966) at p 337 (emphasis supplied)

18

Page 15of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp 812-1444 7

enjoy cost savings19 Hartford Life asserts that its proposed fund substitutions will result in lower fund fees for contractholders For most of the proposed substitutions the claimed lower expense ratio would be the result of a distribution fee (Rule 12b-1 20

) that would be 5 basis points (005) lower than current fees not the result of replacing higher management fees In fact expenses for the AFIS Funds are among the lowest in the industry

AFIS has offered to create a share class with a 12b-1 fee that is 5 basis points lower than the current fee or alternatively exchange contractholders into an existing share class of the Funds that has no 12bshy1 fees The latter approach would result in existing Fund fees lower than the proposed replacement fund fees CRMC has repeatedly sought to negotiate with Hartford Life over issues like these and avoid the need for a hearing Unfortunately Hartford Life has chosen not to accept any of CRMCs overtures demonstrating that Hartfords concern is not for its contractholders but rather is solely for its own bottom line

IV CRMC is an Interested Person Entitled to Request a hearing

To be an interested person entitled to request a hearing on an application under the 1940 Act a requestor must state an ownership or other direct interest in the Applications at issue or demonstrate that it is likely to suffer concrete harm if the Applications were granted 21 Here if the Applications were granted CRMC would suffer specific and material harm Hartford Life contractholders own approximately $73 billion in AFIS Fund shares and the substitutions would affect 5 to 14 of each Funds assets as of November 30 2016 In addition to the harm inflicted on AFIS Funds shareholders CRMC would lose its contractual benefit of advisory fees resulting from the effect of the proposed substitutions on

19 See eg S Roth S Krawczyk amp D Goldstein Reorganizing Insurance Company Separate Accounts Under Federal Securities Laws 46 Bus LAW 537 at n 142 and accompanying text (Feb 1991 )

20 17 CFR sect27012b-1 (2016)

21 See eg The Chase Manhattan Bank NA and Chemical Bank 1940 Act Rel No 23186 (May 14 1998) (order) available at httpwwwfunddemocracycomC hase20 Hearing20Req uest20 Den ia I htm Potomac Capital Investment Corp 1940 Act Rel No 17238 (Nov 28 1989) (order) Shearson Loeb Rhoades Inc 1940 Act Rel Nos 11834 and 11835 (June 26 1981) (orders)

22


the AFIS Funds assets 22 Therefore CRMC would be harmed if the Applications were granted

The Commissions 1940 Act Rule 0-5(c) provides that the Commission will order a hearing when it appears that a hearing is necessary or appropriate in the public interest or for the protection of investors (1) upon the request of an interested person or (2) upon its own motion23 CRMC has raised material issues of fact and policy in this request that warrant a hearing and its request raises issues of public interest and investor protection relevant to the Applications 24 some of which the Commission has not previously considered 25

Further because CRMC has identified its concrete interests that would be impaired if the Applications were granted an Agency decision not to grant a hearing would render CRMC aggrieved by the issuance of an order approving the Applications 26 Indeed any Commission order that effectively abrogated modified or impaired CRMCs existing contractual rights would result in an uncompensated taking of CRMCs valuable property in violation of the Fifth Amendment to the US Constitution27

Beyond Due Process concerns the Administrative Procedure Act requires a hearing to permit the development of the issues presented by

The substitutions also would result in fee increases for remaining shareholders in some AFIS Funds as certain of the funds would lose the benefit of breakpoints in their advisory fees due to the impact of the proposed substitutions on the assets of such funds

23 17 CFR sect 2700-5(c) (2016)

24 See eg Pantepec International Inc 1940 Act Rel No 17908 (Dec 20 1990)

25 See eg Vanguard Index Funds et al 1940 Act Rel No 24789 (Dec 12 2000)

26 See eg Warth v Seldin 422 US 490 508 (1975) (noting that the right to a hearing and the ability to contest the denial of a hearing extend to persons and entities like CRMC that have suffered an injury in fact-an invasion of a legally protected interest that is concrete and particularized) and Fund Democracy llCv SEC 278 F3d 21 28 (DC Cir 2002) (similarly holding in the context of 1940 Act Rule 0-5(c))

See eg lynch v US 292 US 571 579 (1934) (holding that valid contracts are property) and Cinega Gardensv US 331F3d1319 1334 (Fed Cir 2003) (holding that agreements between private parties give rise to protected property interests for Due Process Clause purposes)

27

28


the Applications as well as to elucidate the appropriate standard for review of substitution applications 28

Very truly yours

cc Honorable Mary Jo White Chair Honorable Michael S Piwowar Commissioner Honorable Kara M Stein Commissioner David W Grim Dir Div of Inv Mgmt Michael Downer CRMC Sr Vice-Pres Sr Counsel amp Secy Paul Roye CRMC Sr Vice-Pres Sr Counsel Michael Triessl CRMC Sr Vice-Pres Sr Counsel Lisa Proch Hartford Life Vice-Pres Asst GC

Please find enclosed proof of service upon the Applicants

See eg Administrative Procedure Act sect555(b) 5 USC sect555(b) which provides in part

So far as the orderly conduct of public business permits an interested person may appear before an agency or its responsible employees for the presentation adjustment or determination of an issue request or controversy in a proceeding whether interlocutory summary or otherwise or in connection with an agency function

As the language of the Act suggests an interested person has a right to appear before an agency qualified only by the absence of any impairment to the orderly conduct of business that might be caused by such a hearing As discussed above CRMC is likely to suffer material harm if the Applications were granted and has alleged issues of f~ct or law relevant to the applications Given the fact that contractholders representatives have also sought a hearing-and they are the most directly affected by the pendency of the Applications it would be impossible to conclude that CRMCs request for a hearing would in any manner adversely affect the orderly conduct of the Commissions business

CERTIFICATE OF SERVICE RE APPLICATION OF HARTFORD LIFE FOR AN ORDER OF SUBSTITUTION UNDER THE 1940 ACT

SEC File Nos 812-14446 amp 812-14447

I Harvey L Pitt an attorney at law representing Capital Research and Management Company (CRMC) in connection with the above-captioned Administrative Proceedings hereby certify that on January 3 2017 I caused a true and correct copy of the foregoing Request for a Hearing filed on behalf of CRMC to be served by hand delivery on the following

Lisa Proch Vice-President Asst GC Hartford Life Ins Co One Hartford Plaza PO Box Mail Stop-NP4-TRI Hartford CT 06155

sl7~ arvLPitt

of17 December 30 2016 BrentJ Fields Esq SEC File Nos 812-14446 amp 812-14447

without any consideration of the rights of these contractholders The Commission should not lend its imprimatur to such an unprecedented substitution

We urge that the Commission decline to issue the requested orders instead directing Applicants to follow the customary and less convoluted method by which new insurance dedicated funds are developed and marketed to variable annuity contractholders-that is by establishing and marketing new funds as additional investment choices for contractholders This well established method requires no government intrusion or action and is wholly lacking in the controversy surrounding the instant Applications This approach would also afford contractholders the freedom to which they are contractually entitled-to determine for themselves the value for and the personal aptness of the Applicants proposed new funds in light of each contractholders individual circumstances

On behalf of CRMC we hereby request a hearing on the Applications1

I Reasons for Granting the Requested Hearing

The Applicants seek a Commission Order authorizing them to substitute certain securities underlying the variable annuity contracts sold by Hartford Life pursuant to Investment Company Act of 1940 (1940 Act) sect26(c)2 as well as an Order pursuant to 1940 Act sect17(b)3 exempting the proposed substitution transactions from 1940 Act sect17(a)4 In

The Applications would if approved without a hearing by the Commission (or if approved by its Staff pursuant to delegated authority) abrogate existing and valuable arms-length contracts without affording CRMC AFIS or AFIS funds investors (adversely affected contractholders) that affirmatively chose to invest in AFIS Funds due process of law Hartford Life contract holders own approximately $73 billion in the AFIS Funds and the Applications would affect 5-14 of each affected Funds assets as of November 30 2016 Under the Fifth Amendment to the US Constitution the Administrative Procedure Act and the 1940 Act CRMC as the manager of the AFIS Funds would suffer demonstrable and material harm by the grant of the government action sought in the Applications and therefore has standing to contest these Applications and to request a hearing on them See discussion at p 15 infra

2 15 USC sect80a-26(c)

3 15 USC sect80a-17(b)

4 15 USC sect80a-17(a)












6 Seen 1 supra



























II Factual Issues


















13












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16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





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of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp812-14447











6 Seen 1 supra



























II Factual Issues


















13












Ill Legal Issues




















16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

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Very truly yours







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sl7~ arvLPitt



























II Factual Issues


















13












Ill Legal Issues




















16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt

of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp 812-14447



















II Factual Issues


















13












Ill Legal Issues




















16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt













II Factual Issues


















13












Ill Legal Issues




















16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt

of17 December 30 2016 BrentJ Fields Esq SEC File Nos 812-14446 amp812-14447





II Factual Issues


















13












Ill Legal Issues




















16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt















13












Ill Legal Issues




















16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt












Ill Legal Issues




















16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt


















16 See17 CFR sect 20030-5(a)(1) (2016)












18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt











18








20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt

of17 December 30 2016 Brent J Fields Esq SEC File Nos 812-14446 amp 812-1444 7







20 17 CFR sect27012b-1 (2016)


22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt

22







23 17 CFR sect 2700-5(c) (2016)





27

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt

28



Very truly yours







SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt


SEC File Nos 812-14446 amp 812-14447



sl7~ arvLPitt

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